Margin Requirements for Credit Default Swaps
A derivative is a security that is not itself an asset but whose value depends upon (is derived from) the value of an asset. If you own an option, for example, you do not own an asset; you own the right to buy (or sell) an asset depending on its future price movements. Likewise, if you buy a credit default swap (CDS), you do not buy an asset; you buy protection for an asset you already own in case it should default. In exchange for this credit protection, you provide the seller a stream of monthly payments.
A credit default swap is a form of insurance designed to protect an asset owner from credit risk. The owner of the asset swaps its credit risk for credit protection. The credit protection buyer (the beneficiary) agrees to pay a monthly premium in return for a promise by the credit protection seller (the guarantor) to pay a given coverage in case some defined credit event should occur. The buyer of a credit default swap may be a bank wishing to insure a specific set of loans, which are the reference asset of the CDS. Prior to 2008, CDSs were unregulated, and they were widely used by both buyers and sellers as a form of speculation.
After the financial collapse in 2008 in which CDSs played a part, FINRA established an inte